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Wall Street Bears Hard To Find Anymore

Bears have quickly become an extinct species on Wall Street, or at least have gone into hiding.

By most measurements investor sentiment is at high levels of confidence and bullishness (low levels of bearishness and fear), usually seen at rally and market tops.

The NAAIM Sentiment Index (National Association of Active Investor Managers) is an unusual 82% bullish. Above 70% is considered to be an area of extreme bullishness.

The Investors Intelligence Sentiment Index (newsletter writers) is 47.9% bulls, 18.8% bears. A more than 2:1 bullish ratio is considered excessive bullishness.

The Consensus Inc. Sentiment Index is 71% bullish. It was 78% bullish four weeks ago. Consensus considers 75% bullish as the level to watch for a potential downside market reversal (25% bullish as the level to watch for an upside market reversal).

Margin debt, borrowing to buy stocks, is close to a record high again on NYSE. The last two record highs were at the market tops in 1999 and 2007.

Investor sentiment is a so-called ‘contrary indicator’. That is, investor sentiment is always at high levels of bullishness at rally and market tops, and high levels of bearishness and fear at market lows.

That only makes sense. As markets rise investors become less worried and increasingly confident. So naturally sentiment would reach high levels of bullishness by the time markets are ready to top out. And vice versa after corrections have had the opposite effect.

But not to worry. Sentiment does not provide buy or sell signals. It only indicates when it’s time to pay closer attention for a potential reversal.

There is no trigger line. What the extreme level will be each time varies considerably, as sentiment can just become more extreme, or can continue at current levels for some time before reversals take place.

We don’t have to look any further than the VIX Index (aka the Fear Index) for confirmation of that.

The VIX has become virtually useless anymore as a provider of warnings regarding investor sentiment. Prior to this year, low readings of fear and bearishness on the VIX (high levels of bullishness) have most often soon seen rallies top out as indicated by the vertical lines.

But VIX has been at levels lower than at any time since the 2007 market top for the entire year so far. And even its low readings last summer did not lead to much of a market decline (about 11% for the S&P 500).

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About The Author

Sy Harding publishes the financial website Street Smart Report Online and a free daily Internet blog at Sy’s Free Blog. In 1999 he authored Riding The Bear – How To Prosper In the Coming Bear Market. His latest book is Beat the Market the Easy Way! – Proven Seasonal Strategies Double Market’s Performance!

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